Dividends are returns paid by the company to their shareholders for the investment that the shareholders have made in the business.
Why do we decide to deposit our money in the bank rather than having it in safe lockers in our house?
Well, the simple reason is that banks pay interest for our money. Likewise, even for making an investment in a company, we need some return which is commonly called dividends paid by the company.
The subject matter of discussion in this chapter is to decide how much dividend is optimum. This can be measured by understanding the impact that dividends would have on the shareholder’s wealth. To understand this, we have two broad theories which are theories of relevance and theories of irrelevance.
Theories of relevance say that dividend do influence the shareholder’s wealth while the theories of irrelevance say that dividends do not influence the shareholder’s wealth.
The Walter Model
The Walter Model is a very famous relevance theory of dividend.
The Gordon Model
The MM Model
The MM model is a prominent theory that says dividend is irrelevant in influencing the shareholder’s wealth.
Apart from this, we have other models like Lintner Model and the Residual theory.
The Lintner Model
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